Tuesday, March 31, 2009

A special report (pdf) from the Economist Intelligence Unit examines the increased possibility for unrest due to the global economic crisis. Manning the Barricades lists three main risk scenarios, with rough probabilities of occurrence:

1. Central Forecast - 60%

Government stimulus stabilises the global financial system and restores economic growth in leading developed markets during 2010, albeit at lower levels than in recent years. This scenario underpins our regular analysis and isnot the subject of this report.

2. Main Risk - 30%

Stimulus fails, leading to continued asset price deflation and sustained contraction in the leading economies-a depression persisting for some years. The stubborn decline in global economic activity is punctuated by occasional rallies that are taken as signs of recovery, but these quickly fade as the underlying downward trend reasserts itself. The prominent role of governments in propping up banks and reviving domestic demand leads to strong political pressure for protectionism, effectively putting the process of globalisation into reverse.

3. Alternative Risk - 10%

Failing confidence in the dollar leads to its collapse, and the search for alternative safe-havens proves fruitless. Economic upheaval sharply raises the risk of social unrest and violent protest.

Luckily, the most probable outcome is the one where everything turns out for the best, but the two negative outcomes still make up a 40% share. In Hold'em parlance, that's like A10 vs. KQ - not exactly a match up on which you'd like to stake your tournament life.

Social unrest has already begun to increase in some parts of the world and the economic conditions that are driving it seem to show little sign of relenting. This unrest can lead to calls for protectionist economic moves, civil disobedience, or outright regime change.

While one might think of such problems being relegated to the third world, there certainly exists the possibility for upheaval in our neighborhood. Certainly the potential for Mexico to collapse under the weight of narco-violence is a sobering prospect, especially for border states. We don't even have to look beyond our borders, however, to be faced with the possibility for trouble.

According to their rankings, the US falls in the "moderate" category, placing 110th out of 165. Very concerning to me is the fact that we are tied with Iceland. While social discontent may not have reached a fever pitch yet, it does not take too much imagination to envision a scenario that would result in violent mass protests if the economy worsens. Any more miscues with executive bonuses and financial bailouts while millions are out of work and hungry could quickly spread into dangerous populist anger. And beyond social discontent, the report lists three other forms of political risks:

threats to democracy over and above outbreaks of political unrest;

a negative impact on economic policies and longer-term potential growth rates—in particular, there is a risk of a descent into protectionism;

a host of geopolitical risks, including ultimately the outbreak of large-scale international conflicts

It can be argued that several of these risks have already started to be realized. While the final wording was softened, "Buy American" provisions in the stimulus package brought calls of protectionism from around the world. A spat over Mexican truck driver privileges brought retaliation tariffs on American goods.

As for threats to democracy, dire financial situations have the possibility to allow government to take unprecedented steps many times at odds with the Constitution. The ramifications of historic levels of government control into private businesses have yet to be fully understood. In the name of expediency, due process can become a casualty.

And perhaps most frightening of all, geopolitical conflict is always a possibility when you owe certain (sometimes unfriendly) nations trillions of dollars and - for one reason or another - decide you cannot or will not pay up. Or perhaps you decide to repay them in currency that has been purposefully devalued after being asked several times nicely to not do such a thing. War can also be a handy way for politicians to divert the attention of an angry populace looking for a scapegoat and an outlet for aggression. They have certainly been started for less.